Banks are less willing to provide loans to the steel sector, given the high default rate and the recent debt impairment from one big steel manufacturers.

Demand is driven by public construction projects

Slim margins and strong competition

Our underwriting stance is cautious

Thailand is a net importer of steel due to low domestic production. The country is ranked 8th in the world as a net importer with net imports of 14.6 million tonnes in 2015. Thailand´s steel demand is expected to increase in 2016 due to new and on-going public construction projects, such as new public transportation systems (underground trains) and new private residential projects in response to the government public housing programme for low-income earners. Demand from the Thai construction sector alone is expected to increase by about 3% in 2016, to 8.4-8.6 million tonnes, following a2% increase in 2015.

We expect Thai steel producers´ margins will increase slightly due to rising demand. Margins should remain stable for steel traders and minor processors, who account for the large majority of Thai steel players. Competition in this downstream segment of the steel sector is very high, leading to very thin margins of just 0.5%-1.5% on average.

The gearing of steel businesses is high due to long trade cycles and slim and volatile margins. As a result, the gap between cash generated and cash required is usually financed by external parties such as banks. However, Thai banks are less willing to provide loans to the steel sector, given the high default rate and the recent debt impairment from one of the big local steel manufacturers at the end of 2015. Usually debts in the steel industry are on secured terms with high interest rates.

Payments in the industry take between 60 days and 120 days. In most cases payments are on time, as any payment delay from a particular buyer will cause the local suppliers to terminate and boycott the business relationship. The payment delay news spread very fast in Thailand as the relationship among the players in the steel industry is strong. That said, due to higher risk and increased volatility in the steel sector, the level of protracted payments is higher than in other industries.

Despite the rather benign growth outlook for the coming 12 months our underwriting stance remains cautious for the steel sector, due to the structurally weak market conditions in this sector and the on-going volatility in the global steel market. Local steel producers are not running cost-effective businesses due to outdated production technology, high labour and energy costs and volatile import raw material prices. Steel/metals traders and wholesalers are mainly weaker buyers due to strong competition and slim margins.